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A Tough Time to Time the Sale of a Business

By Barbara Taylor April 7, 2011 7:00 amApril 7, 2011 7:00 am

True Creative

As with most economic news of late, there are mixed signals right now in the business-for-sale marketplace. Some folks say now is great time to sell — or, at a minimum that the market is better than it has been over the last two years — while others disagree. Where can a business owner turn to get clear direction? Since the dartboard has been used famously for picking publicly traded stocks, let’s ask the Magic 8 Ball a few questions about selling a small business.

Question No.1: Should I sell before 2013?

The Bush-era tax cuts have been extended, and this includes keeping the current capital gains rate at 15 percent until the end of 2012. A large portion of the sale price of a small business can fall into the asset category known as good will. In an asset-sale scenario, sellers typically want as much of the sale price as possible to be classified as goodwill because the Internal Revenue Service will tax it at the capital gains rate — which is usually much lower than the seller’s income tax rate. If a deal is structured as a stock sale, then the entire transaction would be taxed at the capital gains rate applicable for the year of the sale.

If the capital gains rate goes up to at least 24 percent in 2013, as one article suggests, a portion of the incremental value you build in your business over the next few years may be eroded by the higher rate. I’m not big on prognosticating the future of the United States tax code but given the looming deficit issues facing our country, I haven’t come across many who are betting that the capital-gains tax rate will stay at 15 percent after 2012.

Magic 8 Ball says: “Outlook good.”

Question No. 2: Should I sell after 2013?

According to a recent survey of business brokers released in February by BizBuySell, “stable businesses with appropriate price expectations will likely receive quality offers from prospective buyers if they come on the market during the next 12 months.” While I agree with this statement, I find it a bit bland — the same would hold true in almost any market. The statement does allude to one of the underlying reasons more deals are not getting done right now: seller price expectations are inconsistent with current valuations, which have been depressed since late 2008.

The reality is that business valuations have not gone back to pre-recession levels, and it’s entirely possible that they won’t for some time. While it may be disheartening to think of the value of your business being tied to the overall marketplace for investment opportunities, it is. According to the “Ten Year Transfer Cycle” created by Rob Slee, a mergers and acquisition expert who is author of “PrivateCapitalMarkets” and founder of MidasNation — it would appear that the next prime selling market will be between 2013 and 2018. (Here is Mr. Slee’s chart.)

Magic 8 Ball says: “It is decidedly so.”

Question No. 3: Will retiring Baby Boomers affect the market?

The Baby Boomer generation will be retiring over the next 10 to 15 years, during which time an estimated $10 trillion of wealth currently held in privately owned businesses will need to be transferred. Many M&A specialists predict that the marketplace will be awash in businesses for sale as the Baby Boomers barrel into retirement. Simple supply and demand economics would suggest that this single demographic shift will tip the scales to give buyers the advantage in the years ahead.

Magic 8 Ball says: “As I see it, yes.”

Unfortunately, the Magic 8 Ball can offer only so much help. There are lots of factors that can affect the decision to sell — and one or more of these factors may be at odds with one another. Often, the business owner is mentally ready to sell, but the market is less than ideal. Conversely, the market may be right when the owner has yet to commit to an exit strategy.

Whatever your situation, the sooner you start thinking about the many issues associated with the sale of a business and how they will affect you, your family and your transaction, the more successful your outcome is likely to be.

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You're the Boss offers an insider's perspective on small-business ownership. It gives business owners a place where they can compare notes, ask questions, get advice, and learn from one another's mistakes. The blog also offers analysis of policy issues, and suggests investing tips.